What’s Your Best Price?

According to a recent study by JD Power, customers visit an average of 1.4 dealerships before purchasing a vehicle.  As recent as 2005, consumers visited 4.5 dealerships before purchasing.  By using the internet to gather information, customers are significantly narrowing the list of potential vehicles they wish to purchase prior to visiting dealerships.  Before online advertising, dealers often advertised a limited number of vehicles in print, on the radio, or on television.  Now, it is common for dealerships to advertise their entire inventory on their own websites, as well as inventory aggregation websites such as Cars.com or Autotrader.  This leads to higher occurrences of pricing errors and disputes arising from selling a vehicle for a price higher than the price advertised online.

The Federal Trade Commission (“FTC”) recently revised the .com Disclosures, which offer businesses guidance on what types of disclosures businesses should include in their online advertisements to avoid claims of unfair and deceptive practices.  Disclosures should be “clear and conspicuous,” and placed in close proximity to pricing information or triggering terms such as APR, lease payments, and down payments.  If a vehicle is priced incorrectly, a consumer may claim that the dealership’s refusal to honor the posted price constitutes a deceptive practice.  Your goal should be to minimize errors occurring, and promptly correcting any errors you find.  If you fail to do so, consumers may claim that these errors are endemic of the dealership’s deceptive practices.

If you decide to offer “internet only” pricing, you will have to make additional disclosures in your online advertisements.  First, your disclosure should state that the price is only available if the consumer produces something, like a printout of the vehicle display page from your website or the inventory aggregation website.  Also consider excluding prior sales, in case a customer purchases a vehicle and later checks your listings to see what the price posted online is.  If you do not, your failure to honor the advertised price may be deceptive.  This disclosure must be on each vehicle display page, and not only at the bottom of your website’s home page or each department’s webpage.  Your pricing online should be realistic; a customer should be able to purchase the vehicle at the advertised price without making additional down payments, having a particular FICO score, financing the purchase through your dealership, or qualifying for rebates that are not available to all customers.  Remember, if you provide an inventory feed to a third party website, you will be responsible for errors on the third party’s website.  You should review each website to determine whether the disclosures are compliant.

FTC’s “Operation Steer Clear” Targets Auto Dealers’ Deceptive Trade Practices

On January 9, 2013 the Federal Trade Commission (“FTC”) announced enforcement actions against nine automobile dealerships over allegations of deceptive and unfair trade practices.  The FTC alleged that these dealers violated the FTC Act, which prohibits businesses from making false or misleading statements regarding products and services.  The complaints filed by the FTC also included allegations that the dealers violated the Consumer Leasing Act and the Truth in Lending Act by failing to disclose fees, interest rates, and other credit related terms.

Of particular interest is the FTC’s complaint involving a dealer’s advertisement of a purchase price reduced by a down payment.  For example, the dealership advertised a 2008 Chevrolet Tahoe for $17,995 and included in the disclosure that the price was “after $5000 down.”  Even though the advertisement disclosed that the price was conditioned upon the consumer making a down payment of $5000, the FTC alleged that the advertisement was deceptive because the vehicles “are not available for purchase at the prices prominently advertised” since consumers “must pay an additional $5000 to purchase the advertised vehicle.”  Based on anecdotal observation, this practice is far more common than many dealers may believe.

Dealers should closely review their own advertisements to see whether they may be deemed deceptive.  If you have advertisements that show a price contingent upon making a down payment, you should  avoid making these kinds of offers.  If you advertise lease or installment payments, you must make sure that you properly disclose any “trigger terms,” such as APR, duration of the loan, and any additional fees associated with the purchase or lease.  Payments that are “No Money Down” must really be no money down.  If the consumer must pay more to obtain the advertised payment or price, then the offer may be deceptive.

Now Is The Time To Stop Paying For Favorable Reviews

Recently Edmunds.com sued an online reputation company that posted reviews to its website, and other websites such as Yelp.  The lawsuit alleges that the company, Humankind, posted fake reviews on behalf of dealership clients that showed the dealerships in a favorable light.  Last year, Yelp began flagging reviews that it believed were paid for by businesses hoping to boost their popularity on Yelp.  These actions by Edmunds.com and Yelp highlight a growing concern that the parties are trying to manipulate ratings on review websites in order to attract additional business.  Many dealers do not understand that services that offer to post reviews on a business’s behalf for a fee may breach state and federal consumer protection laws.

According to guidance issued by the Federal Trade Commission (“FTC”) on paid reviews:

The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed [emphasis added].

A favorable review posted online about a dealership’s services would fall within the definition of an endorsement.  It is likely that the FTC would find a material connection between dealerships that pay for reviews and the individual endorsers or businesses that compile these endorsements.  If material connections exist between your business and the endorser, the FTC requires full disclosure of this relationship.  In case above, full disclosure would mean each review stating clearly what consideration the dealership paid for the review.  Even if you do not contract with a vendor to submit reviews, you have to comply with the FTC’s rules.  For example, if you give a consumer a gift card in return for a favorable review, the customer must disclose he or she received the gift card in exchange for the review.  Failing to make the necessary disclosures may result in significant fines and penalties.  In one enforcement action, the FTC levied $250,000 in fines against a business for failing to disclose it compensated reviewers for favorable reviews.

If your dealership pays for favorable reviews, you should reconsider this practice.  Failing to disclose material connections between the dealership and the reviewer may result in enforcement actions and significant fines.  If you contract with vendors to provide this service, you are responsible for their conduct.  It is not enough to plead ignorance regarding the vendor’s practices.  When selecting a vendor offering “reputation management” services, you must ask whether or not the vendor pays reviewers for reviews.

 

Minimizing The Risks Of Taking Credit Applications Over The Telephone Or Internet

The Fair Credit Reporting Act (“FCRA”) restricts reasons dealers may use to obtain, use, and share credit reports.  In addition to these restrictions,FCRA requires dealerships to provide certain notices to consumers applying for credit.  Dealerships should only obtain credit reports from consumers when they have express permission to do so.  Issues arise when consumers make inquiries about obtaining financing when they are not physically present at the dealership.  In these cases, it is imperative that the dealership has processes in place to obtain consumers’ written consent or otherwise show they have permission to obtain credit reports on behalf of consumers.  Otherwise, consumers may claim the dealership violated FCRA by accessing the their credit reports without prior consent.

You will need to determine whether your dealership will accept credit applications from consumers that are not physically present at the dealership.  There are inherent risks associated with accessing credit reports when the applicant is not at the dealership that you will need to balance with business considerations such as customer expectations, convenience, and pressure from competitors.  If you choose to accept credit applications and obtain credit reports for consumers prior to them visiting the dealership, you will need to consider implementing the following safeguards in order to stay complaint with FCRA.  For inquiries initiated over the internet, make sure your website requires credit applicants provide “digital authorization,” such as a box applicants check signifying they consent to the dealership accessing their credit reports.  Also, you should only accept credit applications that applicants submit through an encrypted system, such as a form on your website, and not unencrypted media such as email.  If the applicant submits an inquiry over the telephone, you should consider asking the applicant to make an inquiry over a secured, encrypted, form such as one located on your website.  If the applicant is unable to do so, your staff should note on the credit application the date and time they received the application and ask the applicant to send a facsimile authorizing the dealership to access the credit report.

Once the applicant visits the dealership, you should have him or her compete a credit application, sign it, and retain a copy in the applicant’s file.  You are required to provide adverse action notices or credit score disclosures regardless of whether the consumer initiated a credit inquiry at your dealership or remotely, and your processes regarding credit applications submitted by telephone or the internet should incorporate your dealership’s Red Flags Rule and Safeguards Rule compliance programs.  Effective training and monitoring of employees’ access to consumers’ credit reports will help your dealership stay compliant with the FCRA and avoid potential lawsuits.

Don’t Let Repurchase Demands Go Unanswered

Recently some auto dealers I know informed me that lenders are becoming more aggressive with exercising repurchase provisions of indirect finance master agreements.  These demands are usually triggered when a consumer defaults on a loan and the lender, citing a breach of a warranty or representation in the indirect finance master agreement proceeds to compel the dealer to repurchase the contract.  What’s troublesome is that many of these agreements do not obligate the lender to return the collateral to the dealer, thereby leaving the dealer with a bad loan and no vehicle.  Of course, the lender’s interpretation of the indirect finance master agreement is not dispositive of whether your dealership indeed caused a breach.  You should carefully review the demand for repurchase and the facts surrounding the deal to determine your rights and your best method to respond.  Be prepared to challenge demands that you believe are inappropriate and do not let such demands from lenders go unanswered.  Here are some common claims a financial institution will make and what you can do about them.

  • The dealership accepted an impermissible form of down payment:  Indirect finance master agreements typically contain provisions that relate to the forms of down payments that are impermissible.  For example, while some lenders allow consumers to use credit cards to make down payments, others do not.  Just because a lender has accepted credit card payments in the past does not mean your dealership is off the hook.  Your processes should include what forms of down payment are acceptable and what your staff should do if they inadvertently accept an impermissible form of down payment.
  • The deal contains a promissory note or a hold check for the down payment:  Read the indirect finance master agreement.  Depending on the language of your agreement, the hold check or promissory note should not be an issue if you collected the balance due before you assigned the retail installment sale contract to the finance company.
  • The signature or signatures on the retail installment sale contract are forgeries:  Don’t blindly accept the financial institutions assertion that the contract contains forged signatures, even if the financial institution claims it has an affidavit of forgery.  Consumers may state that their signatures were forged if they are unhappy about the agreement to make the purchase.  If you think you can prove otherwise, challenge the assertion.
  • The business did not perfect the lien in time before the consumer declared bankruptcy:  Under federal law, a dealer has 30 days from the time the consumer takes possession of the vehicle or vessel to perfect the lien and protect the financial institution’s security in case the consumer declares bankruptcy.  Under many state laws, the business perfects the lien when the paperwork is processed and filed, not when the state’s DMV finally notes the lien.  Check your state’s laws to see which interpretation applies.
  • The trade-in allowance greatly exceeds the trade-in’s actual cash value:  While adjusting trade values to mask negative equity has been impermissible for nearly a decade, many dealers still use trade-in allowances as a means to discount the sale price of the vehicle.  Lenders may challenge dealers when situations occur where the trade-in allowance greatly exceeds the actual cash value of the vehicle as reflected in the dealership’s accounting records.  If there are reasons why the actual cash value changed after taking the vehicle on trade, you should document the adjustments and reasons for them in your records.  You should consider other means by which to modify the sale price of the vehicle being sold instead of relying upon trade-in allowances to close deals.

 

Financial institutions may try to compel your business to repurchase the loan of a consumer that defaults on his or her obligation.  If the financial institution has placed a demand to repurchase a loan, you should understand your rights under the law before agreeing to the demands.

Elon Musk Explains Tesla’s Approach to Selling Cars

 

Recently I wrote about how Tesla’s unconventional distribution model has broad implications for auto retailing and the current distribution system between auto manufacturer and dealer.   Elon Musk, Chairman of Tesla Motors, responded to concerns voiced by state dealer associations about Tesla’s direct-to-consumer approach for selling its vehicles.  I’ve posted it in its entirety below.  I think Mr. Musk’s most compelling argument is that Tesla’s activity falls outside of state franchise laws relating to factory ownership of dealerships because Tesla has not operated with independent dealerships to date.  I still think concerns remain regarding protecting consumers conducting automobile transactions, which I elaborated upon in my post linked above.  What are your thoughts?

 

October 22, 2012

By Elon Musk, Chairman, Product Architect & CEO

TAGS: CUSTOMERS / CORPORATE / STORES /
 25 comments

There are reasons why Tesla is pursuing a company owned store and service center model that we feel are really important. In many respects, it would be easier to pursue the traditional franchise dealership model, as we could save a lot of money on construction and gain widespread distribution overnight. Many smart people have argued over the years that we should do this, just like every other manufacturer in the United States, so why have I insisted that we take a unique path?

GASOLINE vs ELECTRIC

Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public.

Anyone who has experienced Model S understands that our car is quite different from other vehicles. It is designed with the aspiration of not simply being the best electric car, but being the best car of any kind. Despite being purely electric, it is faster 0-100 than BMW’s top of the range M5 (according to Automobile Magazine) and yet can drive incredibly long distances.

A journalist from The New York Times recently drove Model S all the way from Lake Tahoe to Los Angeles, a distance of 531 miles, using our new Supercharger system to recharge for free in less time than it took to eat lunch. In case your eye skipped over the “for free” part, I would like to emphasize that again – owning a Supercharger enabled Model S really does mean free long distance travel forever on our high speed charging network. Given the high cost of gasoline, this is something that only an electric car company can offer.

Model S also has the largest automotive touchscreen in the world and the ability to add new features and capabilities over the air, just like your computer or mobile phone. This is a car that will keep getting better the longer you own it, creating a difficult comparison for dealers that still have to sell large numbers of old technology gasoline cars.

REACHING PEOPLE BEFORE THEY MAKE A DECISION ON A NEW CAR

By the time most people decide to head to their local dealer, they have already pretty much decided what car they want to buy, which is usually the same make as their old car. At that point it is largely just a matter of negotiating with the dealer on price. Tesla, as a new carmaker, would therefore rarely have the opportunity to educate potential customers about Model S if we were positioned in typical auto dealer locations.

That is why we are deliberately positioning our store and gallery locations in high foot traffic, high visibility retail venues, like malls and shopping streets that people regularly visit in a relatively open-minded buying mood. This allows us to interact with potential customers and have them learn about our cars from Tesla Product Specialists before they have decided which new car to buy. The Product Specialists are also trained to answer questions about electric vehicles in general, not just ours. They are not on commission and they will never pressure you to buy a car. Their goal and the sole metric of their success is to have you enjoy the experience of visiting so much that you look forward to returning again.

As it is, our Product Specialists could not sell you a car today under any circumstances, as Model S is already sold out several months in advance and there is no inventory on site. All they can do is get you to consider placing a reservation. Our stores are designed to be informative and interactive in a delightful way and are simply unlike the traditional dealership with several hundred cars in inventory that a commissioned salesperson is tasked with selling. Our technology is different, our car is different, and, as a result, our stores are intentionally different.

FAIRNESS & FRANCHISING

The U.S. automotive industry has been selling cars the same way for over 100 years and there are many laws in place to govern exactly how that is to be accomplished. We do not seek to change those rules and we have taken great care not to act in a manner contrary to those rules.

Automotive franchise laws were put in place decades ago to prevent a manufacturer from unfairly opening stores in direct competition with an existing franchise dealer that had already invested time, money and effort to open and promote their business. That would, of course, be wrong, but Tesla does not have this issue. We have granted no franchises anywhere in the world that will be harmed by us opening stores.

Regrettably, two lawsuits have nonetheless been filed against Tesla that we believe are starkly contrary to the spirit and the letter of the law. This is supported by the nature of the plaintiffs, where one is a Fisker dealer and the other is an auto group that has repeatedly demanded that it be granted a Tesla franchise. They will have considerable difficulty explaining to the court why Tesla opening a store in Boston is somehow contrary to the best interests of fair commerce or the public.

It is further worth noting that these franchise laws do not even exist in the rest of the world, where almost three quarters of premium sedan sales take place.

SERVICE COVERAGE

Finally, I’d like to address another issue that is very important to us as a company. We believe service is a top priority for every customer. At the beginning of 2012 we had 10 Stores, 1 Gallery and 9 Service Centers in the United States. At the end of this year, we plan to have 19 Stores, 3 Galleries and 26 Service Centers. In less than three months from now we will have more Tesla Service Centers in the United States than Stores and Galleries combined. We are opening service centers in numerous cities where we do not even have stores. This will ensure that all customers in these areas will have access to Tesla certified technicians, despite the fact that we do not have a store in the immediate area. By the end of this year, over 85% of all Model S reservation holders in North America will be within 50 miles of a Tesla Service Center. 92% will be within 100 miles. Service is a top priority at Tesla and always will be.

At Tesla, we will continue to focus on the future and the future of your children, grandchildren and their children. In order to accelerate the adoption of EVs, we must be able to create and execute a business model that allows us to advance the knowledge of EVs in a convenient, accessible, no pressure environment.

Elon

 

 

Via the Tesla Blog

Image Courtesy of Discover Magazine

Tesla’s Sales Processes May Lead To Shocking Results For Consumers

Automotive News recently published an article about Tesla and its nontraditional distribution model for its high-end electric cars.  Usually, automobile manufacturers establish relationships with independent businesses to sell vehicles in a particular market and do not sell vehicles directly to consumers.  There are a host of reasons why manufacturers would want to do this.  Dealerships are very capital-intensive.  They typically have large overhead costs because of the size requirements of a typical dealership (display areas, utilities, service areas, showrooms, offices, etc), high staffing costs because of the number of employees required to operate the dealership, and high inventory costs.  Automobile dealerships purchase their new vehicle inventory from their respective franchisor, and payments are due upon release of the vehicles from the factory.  So, by shifting these costs and risk to the independent dealership, the manufacturers can expand into new markets with little to no significant increases in cost.

Tesla has taken a different approach.  Instead of seeking out independent businesses to sell Tesla vehicles through a franchise arrangement, Tesla will sell vehicles directly to consumers.  Tesla selected several strategic locations that allow consumers to get information on the vehicles and experience them firsthand.  Some states do not allow manufacturers to own dealerships directly.  In these states Tesla seeks to operate a showroom to display the vehicles but claims it will not offer the vehicles for sale from these locations.  Many state dealer associations have challenged the legality of Tesla’s showrooms in their respective states.

Tesla’s distribution model presents a novel question of legality since most state franchise laws were written to address steps taken by manufacturers to sell vehicles outside of franchise agreements with independent businesses (a case study of Ford’s activities that gave rise to the modernization of many state franchise laws can be found here.)  Since Tesla does not have any franchise agreements with independent businesses, there are questions regarding if many state franchise laws apply to Tesla’s practices.

There are numerous arguments for and against the franchisor/franchisee arrangement and car sales.  I’m not going to address those arguments here.   Instead I will illustrate why this distribution method may be harmful to many parties.  Consider the following scenarios:

  • Suppose an offshore manufacturer sets up dealerships in malls and sells vehicles to consumers that end up having serious flaws.  Said offshore manufacturer then terminates its leases at its mall locations and ceases all operation in the United States.  The US holding company handling the offshore manufacturer’s presence in the US has no assets.  Consumers have nowhere to turn to seek relief for their damages.
  • Suppose Ford, taking a cue from Tesla’s success against state dealer associations, decides to create a brand called “Continental” that will be sold at high-end malls, storefronts in ritzy parts of town, etc.  Ford will continue to make Lincolns, but it is clear that Continental receives the lion share of Ford’s investment in non-Ford branded vehicles and Lincoln suffers accordingly.  A few years pass, and Continental never pans out for Ford as planned.  Ford decides to discontinue Continental  but keeps Lincoln because of state franchise laws make termination of a brand costly.  Consumers that purchased Continentals are now left with cars that have reduced value and may or may not receive after sales support (service and parts).    Depending on how Ford structured its subsidiary, consumers may have no redress against Ford for issues with Continental.  Ford-Lincoln dealers are harmed because the value of the Lincoln brand was greatly diminished by lack of investment (that was diverted to Continental). 

As the scenarios above illustrate, direct selling shifts a lot of risk to consumers.  Many states require manufacturers to compensate dealerships for the termination of brands, and make termination of dealerships very difficult.  These protections are very beneficial to consumers as well.  They ensure that smaller markets can be serviced by existing dealerships and they make manufacturers think twice about exiting a local, state or the national market.  In particular, the second scenario that hypothesizes a new luxury brand by Ford is the more likely of the two scenarios to happen should Tesla prevail against state dealer associations.  If manufacturers were free to develop brands for sale outside of their existing network, they would effectively obliterate state franchise laws that protect both dealerships and consumers.  Manufacturers could create and kill brands with ease, leaving customers with assets with little value and little recourse.

While it may not be such a big deal for seasonal retailers like Halloween and Christmas stores to come and go from a community, many state and local governments don’t want the same for businesses selling vehicles.  Auto retailing is highly regulated by federal, state and local governments.  Vehicle sales entail title and licensing requirements, and dealerships have to comply with a host of other regulatory requirements.  The majority of these regulations serve to protect consumers, which complement the protection afforded by state franchise laws mentioned above.

Dealerships and manufacturers alike seek to make purchasing a car as easy as possible.  Nevertheless, buying a car is an infinitely more complex transaction than purchasing an iPhone, PS3, or sweater.  There is no question we can do better to make the sales process more consumer friendly.  What we shouldn’t do is make the transaction more risky for the consumer.

Source:  Automotive News (linked to in this post).

Image Courtesy of Gawker